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Civil Litigation Flash Points May 2009

Civil Litigation FlashPoints May 2009

This month, three recent decisions from the Illinois Appellate Court impart a review of one of the basics - personal jurisdiction for Illinois civil litigation.

Knaus v. Guidry, No. 1-07-3509, 2009 WL 839925 (1st Dist. Mar. 27, 2009).  In Knaus, the two plaintiffs were residents of Florida and Missouri. They sued multiple defendants in the Circuit Court of Cook County alleging that they were defrauded in what was described as an "advance fee scheme." The plaintiffs asserted that they were induced to place $390,000 in escrow for the benefit of a Wyoming company. The plaintiffs allegedly were told that the escrow account would be used to secure a loan. In the event that the loan was obtained, the plaintiffs would effectively double their money and collect $780,000. If the loan didn't come through, then the plaintiffs were supposed to get their money back.

The plaintiffs made the investment and, needless to say, never saw their funds again or any proceeds from the transaction. In their complaint, the plaintiffs alleged that the defendants conspired to defraud and to convert their funds for their own benefit, among other causes of action. The plaintiffs asserted that Guidry, a Texas lawyer, and his law firm served as an intermediary in the scheme and that they had in fact transferred some of the plaintiffs' money to an Illinois entity. Guidry moved to dismiss for lack of personal jurisdiction supported by affidavits averring that neither he nor his law firm had any contacts with the State of Illinois and that they had not drafted any contracts or documents or performed any of the actions giving rise to personal jurisdiction in Illinois under 785 ILCS 5/2-209(a). The plaintiffs responded claiming that Guidry was subject to personal jurisdiction in Illinois because he had transacted business and had committed a tortious act in this state by arranging to have their funds transferred to Texas from Illinois and then by dispersing the money to other defendants, including an Illinois resident.

The circuit court denied Guidry's motion to dismiss after engaging in the two-step analysis set forth in International Business Machines Corp. v. Martin Property & Casualty Insurance Agency, Inc., 281 Ill.App.3d 854, 666 N.E.2d 866, 868, 217 Ill.Dec. 197 (1996). First, the trial court considered whether the plaintiffs' claims against Guidry fell within the ambit of the Illinois long-arm statute. The court concluded that the plaintiffs adequately alleged that the defendants had committed a tortious act within the State of Illinois. The circuit court then tackled the second step of the analysis, which required it to determine whether its exercising jurisdiction over the defendants would violate applicable constitutional due process guarantees. The trial court found that its exercise of jurisdiction in regards to the defendants was consistent with the constitutional guarantees because the defendants' role in the conspiracy as a conduit for the plaintiffs' funds established minimum contacts with the State of Illinois.

On appeal, the defendants challenged the circuit court's exercise of personal jurisdiction on due process grounds because they had never been physically present within Illinois, had not conducted or directed activities in or towards the state, and had not entered into any relationship with any individual present in Illinois. The appellate court noted that the two-step analysis set forth in International Business Machines had been rendered out-of-date in light of the addition of §2-209(c) to the long-arm statute (the "catchall" provision), as explained in Kostal v. Pinkus Dermatopathology Laboratory, P.C., 357 Ill.App.3d 381, 827 N.E.2d 1031, 293 Ill.Dec. 150 (2005). Now, the appellate court observed that if the contacts between a defendant and the forum state are sufficient to satisfy due process concerns under both the U.S. and Illinois Constitutions, then the requirements of the Illinois long-arm statute have been met. The court commented that under the U.S. Constitution, jurisdiction may be "general" or "specific." "General jurisdiction" applies to lawsuits that do not relate to or arise out of a party's contacts with the forum state and is found only when the nonresident defendant has continuous and systematic contacts with the forum state. Personal jurisdiction founded on "specific jurisdiction" arises out of a defendant's specific contacts with the forum state so that maintenance of the lawsuit does not offend the due process guidelines of fair play and substantial justice under the U.S. Constitution or the fair, just, and reasonable considerations contained in the Illinois Constitution.

As the First District Appellate Court observed, jurisdiction in the case had to be found on the basis of specific jurisdiction because the defendants had not engaged in continuous, systematic contact with Illinois so as to subject them to general personal jurisdiction. The appellate court further commented that the plaintiffs had the burden of establishing that the defendants were subject to personal jurisdiction in Illinois. According to the appellate court, the plaintiffs' jurisdictional claims boiled down to three: (1) that the defendants had transferred plaintiffs' funds from Illinois to Texas, thus both transacting business and committing tortious acts in Illinois; (2) that the defendants had committed further tortious acts within the State of Illinois by transferring some of the converted funds back to a coconspirator located in Illinois; and (3) that the defendants had acted in support of a conspiracy in Illinois.

Treating these contentions in order, the appellate court held that plaintiffs had not shown that the defendants negotiated the transfer of their funds from Illinois, thereby committing a tortious act, or engaged in other business transactions in this state in furtherance of the conspiracy. The appellate court reasoned that the mere transmission of funds into a state does not constitute a sufficient contact so as to subject the sender to personal jurisdiction in that state.

In the end, the appellate court determined that the plaintiffs were left to rely upon the "conspiracy theory of jurisdiction." Under that theory, if one coconspirator is subject to jurisdiction in Illinois, then so are all of the others pursuant to an agency analysis. The appellate court found that the Illinois Supreme Court to date has indicated a hesitancy to approve the conspiracy theory of jurisdiction (e.g.,Green v. Advance Ross Electronics Corp., 86 Ill.2d 431, 427 N.E.2d 1203, 1208, 56 Ill.Dec. 657 (1981)), and conflicts exist between appellate court districts concerning the viability of this basis for personal jurisdiction. After an in-depth analysis of the splits in authority, the appellate court declined to adopt the conspiracy theory of jurisdiction. The court concluded that under the applicable decisions of the U.S. Supreme Court, conduct sufficient to subject a foreign defendant to the jurisdiction of a particular forum must involve at the very least an act purposefully directed at the forum state, such as conduct designed to create an injury in that state. With this threshold in place, defendants get the requisite "fair warning" that a particular activity may subject them to jurisdiction in a foreign state in satisfaction of due process. Burger King Corp. v. Rudzewicz, 471 US. 462, 85 L.Ed.2d 528, 105 S.Ct. 2174, 2182 (1985).

Turning to the specific facts of the case, the appellate court determined that the plaintiffs had failed to show that the defendants had purposefully directed any conduct towards Illinois. The court observed that the purpose of the defendants' conspiracy was to separate the plaintiffs from their money. However, the resulting injury was suffered by plaintiffs in their native states, not in Illinois. Thus, the appellate court in reversing the trial court concluded that the defendants were not subject to in personam jurisdiction in Illinois.

Dickie v. Cannondale Corp., No. 1-07-2810, 2009 WL 679274 (1st Dist. Mar. 13, 2009). Dickie demonstrates the difficulty faced by plaintiffs injured by products manufactured in whole or in part overseas. Dickie had an accident while riding a Cannondale bicycle. He claimed that the accident and his resulting injuries were caused by the defendants' negligence. The named defendants included Wellgo, the Taiwanese manufacturer of the pedals that allegedly caused or contributed to the injuries. Wellgo moved the circuit court to dismiss for lack of personal jurisdiction, which was granted with prejudice.

The evidence established that Wellgo was in the business of designing and manufacturing bicycle pedals. Once manufactured, the pedals were sold and shipped to independent distributors, and Wellgo had no further involvement with the products. Affidavits showed that Wellgo was not licensed, registered, or authorized to do business in any state of the United States. Further, Wellgo had never sold or shipped products, executed a contract, provided services, paid taxes, possessed assets, maintained a telephone or fax number, employed any individuals, attended any trade shows or meetings, advertised or otherwise solicited business in Illinois, or in any other manner purposely directed any activity towards the state. The bicycle was a Cannondale product, but there were no contracts or agreements between Wellgo and Cannondale.

On appeal, the First District Appellate Court noted the general rule that the plaintiff has the burden of proving a prima facie case for jurisdiction when seeking to have an Illinois court assert jurisdiction over a nonresident defendant. The appellate court observed that the §209(c) "catchall" provision allows an Illinois court to exercise personal jurisdiction on any basis permitted by the state and federal constitutions. Consequently, the provisions of the statute require that the due process guarantees of both the U.S. and Illinois Constitutions need to be satisfied. The appellate court stated that the federal due processes analysis involves a three-pronged test consisting of determining whether: (1) the nonresident defendant has certain "minimum contracts" with the forum state so as to impart fair warning that it can be haled into court there; (2) the action arose out of the defendant's conduct in the forum state; and (3) it is reasonable to require the defendant to litigate in the forum state. As for this test, the appellate court observed that the injured plaintiff was arguing primarily for a "stream of commerce theory" of personal jurisdiction. On this subject, the court noted that the U.S. Supreme Court had split evenly in the case of Asahi Metal Industry, supra, with four justices finding that the placement of a product into the stream of commerce without more did not constitute an act purposefully directed towards the forum state. The appellate court also noted that the Illinois Supreme Court decided in the wake of Asahi Metal Industry that personal jurisdiction founded on "purposeful availment" of the forum state's market requires at a minimum that the alien defendant is aware that the finalized product is being marketed in the forum state. Wiles v. Morita Iron Works Co., 125 Ill.2d 144, 530 N.E.2d 1382, 1390, 125 Ill.Dec. 812 (1988).

Turning to the facts of the case, the appellate court noted that Wellgo was aware that Cannondale was an American company that distributed its bicycle products throughout the United States, but the plaintiff produced no evidence showing that Wellgo had any awareness specifically about where and how Cannondale's products were marketed and sold. Wellgo had no presence in Illinois and was not licensed to do business in Illinois. The Taiwan company had no offices, telephone numbers, employees, agents, or property located in Illinois, and there was no evidence that it had ever attempted to market, advertise, or ship products within Illinois. As a consequence, the appellate court in affirming the trial court's dismissal with prejudice determined that the evidence failed to establish that Wellgo had the minimum contracts necessary with Illinois for its courts to exercise personal jurisdiction without violating the defendants' due process rights.

Old Orchard Urban Limited Partnership v. Harry Rosen, Inc., No. 1-08-0815, 2009 WL 650855 (1st Dist. Mar. 11, 2009). The First District Appellate Court in Old Orchard considered wide-ranging questions concerning whether a Cook County circuit court could exercise personal jurisdiction over a Canadian corporation headquartered in Toronto in an action brought by an Illinois shopping mall landlord to collect a default federal judgment entered on a lease involving one of Harry Rosen's U.S. subsidiaries. Harry Rosen was not a party to the lease and was not involved in any of the lease's representations, warranties, or guarantees. The trial court had dismissed the Canadian corporation, finding no basis for exercising either general or specific jurisdiction over Harry Rosen in Illinois.

On appeal, the appellate court reviewed the handling of corporate defendants under the Illinois long-arm statute. The court advised that the concept of "doing business" is decidedly different from "transacting business." When a business entity is found to be engaging in a continuous and systematic course of business in Illinois, it is "doing business," and the entity is considered a resident of Illinois for jurisdictional purposes. The appellate court advised that this kind of jurisdiction is called "general jurisdiction." In contrast, when the company is merely transacting business in Illinois, the state courts only have jurisdiction over those causes of action that either directly involve the business transactions taking place within the state or arise out of them. This type of jurisdiction is known as "specific jurisdiction."

Here, the landlord Old Orchard claimed only that specific jurisdiction existed in Illinois over Harry Rosen because the Canadian parent corporation so dominated and controlled its domestic U.S. subsidiaries so as to frame Harry Rosen as their alter ego and cause a piercing of the subsidiaries' corporate veils. Essentially, the case involved the intriguing issue of whether a corporate veil can be pierced for purposes of establishing personal jurisdiction over a related corporate entity. For that endeavor, the appellate court determined an essential conflict-of-laws question that the laws of the forum state would apply rather than the state of incorporation because the forum state has the highest and greatest interest in the jurisdictional reach of its own courts.

Ultimately, the plaintiff was unsuccessful in its claims against Harry Rosen. The corporate parent and its subsidiaries were engaged in separate and distinct business ventures, the requisite corporate formalities were observed, the subsidiaries were adequately capitalized, and above all the court credited the fact that Harry Rosen had expressly refused to participate in any part of the transaction that ultimately gave rise to the subsidiaries' default under the lease. The circuit court's dismissal of the lawsuit against the Canadian corporation for want of personal jurisdiction was confirmed by the appellate court, leaving the landlord to chase after the asset-less subsidiary companies for satisfaction of the judgment.